The Future of Venture Capital Investing – Venture capital is built on the business of capitalizing on innovation and disruption. While venture capitalists are adept at identifying entrepreneurs and companies at the forefront of changing trends, the venture capital industry itself has also been undergoing innovation and change in recent years. More recently, the trends of big data, artificial intelligence and machine learning technology that venture firms have helped catalyze advancement in, have converged on venture investing itself.
Historically, the traditional venture model relied primarily on carefully cultivated personal networks and brands of venture capital firms, an apprenticeship model of developing venture capital investment expertise and acumen, and a reliance on historical pattern recognition and “gut-feel” to make investment decisions. However, the new, “big data” model brings data analytics to the forefront to inform the various steps of the venture capital investment process, including sourcing, screening, selecting and monitoring investments as well as aiding portfolio companies post-investment.
The phenomenon of “big data” is often summarized by the notion of three Vs: volume, velocity and variety. It refers to the large volume of data that companies store and analyze nowadays, generated from a greater variety of data sources with multidimensional data fields with a high frequency of data generation and data delivery. In the era of “big data”, the advent of new data sources and analytic techniques enables a data-driven investment process for VC firms to utilize.
To start, the deal origination process fundamentally transforms from an inbound orientation to an outbound orientation by means of the usage of data. By accessing investment networks VC’s combine company information with market research for a better overview of newly founded startups, which are potential investment deals. The usage of data, especially from web-based services like Peachscore, can have a crucial impact on deal origination, as it reduces the effort required to search for new investment deals and simultaneously provides a broader and more sophisticated basis for decision making.
Data usage can also play an important role in the screening stage, particularly when data from external web-based services is combined with the data from the internal customer relationship management (CRM) system. Social media presence, product reviews, and data points from app stores and websites are all alternative data points that can help a VC weed out an undesirable investment during the screening stage. These data collection strategies will enable early-adopting venture capitalists to benefit by automating what has historically been a manual process full of human error, inaccuracies, and a lack of properly cross-referenced information.
With a variety of benefits at many of the stages of the VC investment process, it’s no wonder that many within the industry are already turning to “big data” usage. A report done by PitchBook found that 86% of respondents believe data is important when evaluating investment opportunities, and that 17% of the time insufficient data was the reason for missing out on a promising investment.
Broken down even further, 38% of all respondents use data to source all venture capital investments, whereas 48% claim data informs some investment decisions and only 9% don’t leverage data at all.
Peachscore sees the potential that a data-driven investment process can have for the VC industry, and plans to be the vehicle that enables investors to make the jump into leveraging data in investment decision making. By collecting, analyzing, and validating early-stage companies’ information in real-time using 14 different dimensions with over 241 evaluation factors, Peachscore’s engine then uses these factors to generate a risk rating or Peachscore for each company along with a personalized intelligence report.
Peachscore’s AI-driven platform is democratizing access to insights that were previously restricted to the proprietary and expensive-to-build algorithms of the most sophisticated VC’s shops, allowing VC investors to access the data and analytics required to make more informed decisions, faster, and at a fraction of the cost. Peachscore is building an online community where both founders and investors can be matched and connected based on the underlying metrics of the startup and the investments thesis of the VC, while eliminating the waste, bias, and inefficiencies in this market.
While, 85% of respondents in the PitchBook report believe VC investment decisions will always involve some element of intuition, leveraging data proponents will help VC firms expedite and streamline the unicorn hunt when it comes to the investment process. The universe of capturable data points is expanding, and VCs are developing a better understanding of their biases and cognitive shortcomings, meaning gut instinct alone just may not be good enough anymore.